Ch 20

Question 1

Corporate liquidation

Answer 1

Occurs when a corporation distributes its net assets to its shareholders and ceases to be a going concern. Generally, a shareholder recognizes capital gain or loss upon the liquidation of the entity, regardless of the corporation’s balance in its earnings and profits account. The liquidating corporation recognizes gain and loss on assets that it sells during the liquidation period and on assets that it distributes to shareholders in kind.

Question 2

Reorganization

Answer 2

Occurs, among other instances, when one corporation acquires another in a merger or an acquisition, a single corporation divides into two or more entities, a corporation makes a substantial change in its capital structure, or a corporation undertakes a change in its legal name or domicile. The exchange of stock and other securities in a corporate reorganization can be effected favorably for tax purposes if certain statutory requirements are followed strictly. Tax consequences include the nonrecognition of any gain that is realized by the shareholders except to the extent of boot received.

Question 3

Section 338 election

Answer 3

When a corporation acquires at least 80 percent of a subsidiary within a 12-month period, it can elect to treat the acquisition of such stock as an asset purchase. The acquiring corporation’s basis in the subsidiary’s assets then is the cost of the stock. The subsidiary is deemed to have sold its assets for an amount equal to the grossed-up basis in its stock.